No end in sight for global slump

The British economy is caught in the early stages of the same death spiral currently gripping Greece, writes Alex Callinicos

Published Tue 16 Oct 2012

Issue No. 2325

The party conferences have been unable to conceal the fact that the government coalition is in big trouble. Its reason for existence is to reduce the budget deficit—indeed chancellor George Osborne’s original plan was to eliminate it.

But all the projections show that the government is failing to fulfil its targets. The fundamental reason for this is that the economy is shrinking. This both reduces government revenues and—since the targets compare the deficit to economic output—makes these targets harder to meet.

This is an early version of the kind of death spiral gripping the Greek economy. Spending cuts cause the economy to shrink, leading the European Union (EU) and the International Monetary Fund (IMF) to demand more cuts.

This in turn leads to further economic contraction and the whole exercise causes tremendous social suffering.

It’s surprising that the witty Norwegian parliamentarians who voted to award the Nobel Peace Prize to the EU didn’t complete the joke by making it a joint award to the IMF too.

But the picture is equally grim at a global level. The Financial Times’s latest survey on the world economy is headlined “Hopes turn to fear and uncertainty”.

The financial crash of 2008 precipitated global capitalism into its worst slump since the Second World War. But the slump was followed by a sharp recovery in 2010. This was mainly because of the vast amounts of money that states threw at the economy to prevent a 1930s style collapse.

But now this recovery has petered out. The IMF’s latest World Economic Outlook predicts 1.5 percent growth next year for the advanced capitalist countries and 5.6 percent for the developing economies.

These projections confirm that the US, the EU and Japan will continue to stagnate, as they have done for the past two years. The figures look better for the so called “emerging market economies”, but nevertheless represent a slowdown.

Investment

The pivotal country here is, of course, China. The Beijing government reacted to the slump by ordering a huge £400 billion investment programme financed by state banks.

This produced a rapid recovery that also pulled up those economies that supply China with raw materials (large parts of Africa and Latin America) and complex manufactured goods (for example, Germany and South Korea).

But now China is slowing down. The IMF forecasts it will grow by 7.7 percent next year—high by developed country standards, but still a third lower than growth before 2008, and China’s lowest growth rate since 1999.

Stagnation in the north has hit an economy heavily dependent on exports, and economists speculate that investment—now nearly half total output—can no longer drive growth.

So the heady talk that the big “emerging market economies”, the Brics (Brazil, Russia, India, China and South Africa), had “decoupled” from the US and EU and could power the world economy on their own has proved to be just that—talk. The other Brics are all slowing down as well.

The most visible obstacle to recovery is the political consensus in the US and the EU that the priority is to cut government borrowing, which was swelled by the efforts to combat the slump.

A growing cloud on the horizon is the so called “fiscal cliff” in the US—a combination of tax increases and spending cuts due to come into effect at the end of the year.

This package would cut 4 percent off gross domestic product. It was agreed by Barack Obama and the Republicans in Congress to resolve the row over cutting US government debt in July 2011.

Central banks are trying to fill the vacuum left by the political elite’s obsession with fiscal austerity by finding various ploys to pump money—£6.2 trillion so far—into the financial system.

But in a crisis that started with a huge accumulation of private debt, the extra money may not be used. Banks stuck with huge quantities of bad loans don’t want to lend, and indebted firms and households are reluctant to borrow more.